Dear Atty. Gab,

Musta Atty! I hope this message finds you well. My name is Juan Dela Cruz, and I run a small graphic design business here in Quezon City. I’m writing to you because I’m quite confused about something related to my income tax from a couple of years ago.

Back in April 2023, when I filed my Annual Income Tax Return (ITR) for the year 2022, I realized I had overpaid my quarterly taxes quite significantly, maybe around P50,000. On the form, I saw the options for what to do with the excess payment. Since my business was doing okay then, I decided to just carry it over to the next year, 2023. I marked the box that said “To be carried over” because I thought I could just use it to offset my taxes for 2023.

However, 2023 wasn’t a great year for my business, and my income was much lower than expected. As a result, I didn’t actually use up much, if any, of that P50,000 credit from 2022. Now, things are still a bit tight, and having that cash refunded would really help my business’s cash flow. Is it possible for me to change my mind now? Can I still apply for a refund for that 2022 overpayment, even though I initially chose to carry it over?

Also, while preparing my recent taxes, I noticed a small difference between the total income reflected on the Certificates of Creditable Tax Withheld at Source (BIR Form 2307) I received from clients in 2023 and the total service income I reported in my 2023 ITR. It’s not a huge amount, maybe a few thousand pesos difference. Could this discrepancy cause problems if I were to claim a refund for any potential overpayment in 2023 itself?

I’m really hoping you can shed some light on this. Thank you so much for your time and guidance.

Respectfully,
Juan Dela Cruz

Dear Juan,

Thank you for reaching out. I understand your concern regarding your 2022 tax overpayment and the confusion about whether you can switch from carrying it over to claiming a refund. It’s a common point of confusion for many taxpayers, especially when financial circumstances change.

In brief, the National Internal Revenue Code (NIRC) specifies rules regarding the options for excess income tax payments. Once you choose the option to carry over your excess tax credit to the succeeding taxable year and indicate this on your annual ITR, that choice becomes irrevocable for that specific overpayment. Regarding discrepancies in reported income versus withholding certificates, this can indeed affect refund claims, as the Bureau of Internal Revenue (BIR) requires proof that the income subjected to withholding tax was properly declared.

Navigating Tax Overpayments: The Carry-Over vs. Refund Dilemma

Understanding your options when you’ve paid more income tax than necessary is crucial for proper tax management. The law provides specific paths, but also sets clear boundaries once a choice is made, particularly regarding the carry-over option.

When a corporation or, in your case, an individual taxpayer subject to income tax, files their final adjustment return (annual ITR) and finds that the sum of their quarterly payments exceeds the total tax due for the year, the NIRC provides distinct options. Section 76 of the NIRC outlines these choices clearly.

Section 76. Final Adjustment Return. – … If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire taxable income of that year, the corporation shall either:
(A) Pay the balance of tax still due; or
(B) Carry-over the excess credit; or
(C) Be credited or refunded with the excess amount paid, as the case may be.

In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid, the excess amount shown on its final adjustment return may be carried over and credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable years. Once the option to carry-over and apply the excess quarterly income tax against income due for the taxable quarters of the succeeding taxable years has been made, such option shall be considered irrevocable for that taxable period and no application for cash refund or issuance of a tax credit certificate shall be allowed therefore.
(Emphasis supplied)

The critical point for your situation lies in the last sentence of this provision. By marking the box “To be carried over” on your 2022 ITR, you exercised the option to carry-over. The law explicitly states that this choice is irrevocable “for that taxable period.” Jurisprudence clarifies that “for that taxable period” refers to the year the excess credit arose – in your case, 2022. It doesn’t mean the irrevocability lasts only for one year; rather, the decision made regarding the 2022 excess credit cannot be changed later.

Therefore, you are precluded from applying for a cash refund or a tax credit certificate for the specific P50,000 overpayment from 2022. The law intends to prevent taxpayers from switching between options for the same excess credit, which could complicate tax administration. The unused portion of that credit remains available to be carried over and applied against your income tax liabilities in the subsequent years (2024 and onwards) until it is fully utilized.

Regarding potential refund claims for other years, like 2023, and the discrepancy you noted, there are strict requirements. To successfully claim a refund for excess creditable withholding taxes, you generally need to satisfy conditions, including proving the income inclusion.

Relevant principles derived from tax regulations (like Section 10, Revenue Regulations No. 6-85, often cited in jurisprudence) require that:
(1) The income upon which the taxes were withheld must be included in the return of the recipient; and
(2) The fact of withholding must be established by a copy of a statement duly issued by the payor (withholding agent) to the payee, showing the amount paid and the amount of tax withheld.

This means the BIR needs to be able to verify that the income corresponding to the withheld taxes (as shown on your Form 2307s) was actually declared as part of your gross income in your ITR for that year (2023). Discrepancies, like the one you mentioned between the total on the 2307s and your reported service income, raise red flags. The tax authorities must be able to trace and confirm these amounts. Failure to reconcile such differences or provide sufficient proof that the income was indeed reported can be fatal to a refund claim.

Furthermore, any claim for refund must be filed within the prescriptive period set by law.

Section 229. Recovery of Tax Erroneously or Illegally Collected. – … no such suit or proceeding shall be filed after the expiration of two (2) years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment…

This two-year period is generally counted from the date the tax was paid (e.g., the date of filing the final adjustment return for annual income tax, or the dates quarterly payments were made).

Practical Advice for Your Situation

• 2022 Overpayment: Accept that the option to carry over the P50,000 from 2022 is final. You cannot switch to claiming a refund for this specific amount.
• Utilizing the Credit: Ensure the unused portion of the 2022 credit is correctly reflected and applied against your income tax due in your 2023 ITR (if any was due) and subsequent years (2024 onwards) until fully utilized. Keep clear records of its application.
• Record Reconciliation: For your 2023 tax filings (and going forward), meticulously reconcile the income amounts reported in your ITR with the total income subjected to withholding as documented in your BIR Form 2307s. Prepare a reconciliation statement if needed.
• Address Discrepancies: Investigate the cause of the discrepancy you noted for 2023. Was there unreported income? Was there an error in summarizing the 2307s? Correcting or explaining this is crucial, especially if considering any refund claim for 2023.
• Proof of Withholding: Always keep original copies of all BIR Form 2307s received from clients. These are essential evidence for claiming creditable withholding taxes.
• Refund Claim Timeliness: If you believe you have a valid claim for refund for 2023 (separate from the 2022 carry-over), remember the two-year prescriptive period under Section 229 of the NIRC, typically counted from the date you filed your 2023 annual ITR or made payments.
• Seek Professional Review: Given the complexities, consider having a tax professional review your 2022, 2023, and ongoing tax filings to ensure accuracy, maximize the use of your carry-over credit, and advise on any potential refund claims for 2023 or future years.

Juan, while you cannot revert your 2022 decision, understanding these rules helps manage future tax situations better. Focus on accurately utilizing the carry-over credit and maintaining precise records moving forward to avoid issues with reporting and potential future refund claims.

Hope this helps!

Sincerely,
Atty. Gabriel Ablola

For more specific legal assistance related to your situation, please contact me through gaboogle.com or via email at connect@gaboogle.com.

Disclaimer: This correspondence is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please schedule a formal consultation.